Case01 JetBlue Airways TN[2]

JetBlue Airways Teaching Note Synopsis:

JetBlue is a low-cost domestic airline in the United States following a rather interesting combination of ‘low-cost and differentiation’ as its strategy. From its inception in 1998, the airline grew to become the 11th largest player in the airline industry in a short span of 6 years. It had been the only other airline apart from Southwest airlines, to have been  profitable  profitable during during the afterma aftermath th of the Septem September ber 11, 2001 2001 attacks attacks on World World Trade Trade Center, Center, and at a time when the entire airline industry was experiencing losses.

The core of JetBlue’s strategy was low-cost achieved through a smaller and more  productive  productive workforce; workforce; automate automated d processes; processes; better better use of of technology; technology; use of of brand new new single model planes that reduced maintenance costs and training costs at the same time. However, moving into the growth phase, JetBlue was contemplating the introduction of a new model of planes, i.e., EMBRAER, that are smaller than the A320s that that they were using. These planes were to be utilized for penetrating mid-size cities and also during offoff peak times times on existing existing routes. routes. This had had potential potential implicat implications ions for its low-cost low-cost strate strategy. gy. Also, the success of JetBlue invited the attention of its competitors. New discount carriers such as ‘Song’ were being launched that closely imitated JetBlue’s differentiated product offering. This posed questions to the viability of both the the bases of JetBlue’s JetBlue’s competitive advantage. Added to this, was the prospect that JetBlue JetBlue would come head-to-head with other ‘major airlines’ and ‘discount carriers’ in its quest for expansion into different geographic markets.

Case Objectives and Use

In terms of its content, writing style and length, the case should be relatively easy for any undergraduate or graduate student to read and understand. The case is written in a style that overviews the situation but intentionally avoids guiding students through any analytical framework or specific application question. In so doing, it provides the instructor with the latitude to adjust class discussion and thereby accommodate the abilities of a wide-range of  students. Specifically, the instructor can invite students to reason through a situation where uncertainty exists and speculation may be required.

This case can be used as either Industry analysis case (chapter 2) or Business Level Strategy Case (chapter 5) or both.

As an industry analysis case, the case provides a very good start to discuss the external environment, i.e., the general environment including the legal factors such as the deregulation of the airline industry, the economic factors, the technological factors, etc., and how they affect the airline industry. It then offers the opportunity to conduct an internal analysis of the firm using the value chain approach or the resource-based view of  the firm, followed by a detailed financial analysis of the firm to complete the various components of internal analysis.

As a business-level strategy case, this case is very well suited to discuss the Porter’s generic strategies, the advantages and disadvantages of those strategies and to discuss the merits and demerits of a combination strategy. Students could also be encouraged to relate their understanding of the sources of competitive advantage that they identified using the internal analysis of the firm as a part of this discussion.

As an extension, the instructor has the latitude to discuss the prospects and problems that JetBlue would encounter in future in its growth endeavor. This could involve a discussion on the various avenues of growth, the feasibility of the avenues, possible competitor  reaction and how the company could cope with it.

Teaching Plan:

The instructor may choose to assign the case to groups of 4-5 students to discuss and  present on this topic. The discussion questions and answers thereof provide a broad overview for the discussion in class. The instructors, however, can engage in their own analysis to guide the discussion.

As Strategic Analysis Case

 Discussion questions:

1.Analyze the industry environment of JetBlue.

To answer this question, the instructor can choose to steer the discussion toward the factors in the general environment, and then toward the competitive environment.

In the general environment of domestic airline industry, the discussion can address the  political/legal, technological, economic and other factors. Under the legal factors, the deregulation of the airline industry in 1978 provided an opportunity to several players to enter the market. It allowed new market segments such as that of the low cost, point-to point services to emerge. It thus changed the industry landscape. Also, the bankruptcy laws have a significant role to play as they allow even non-profitable operators to continue in the industry when they are protected. The emergence of Internet technology and other  technological breakthroughs have had an impact on the way the airlines conduct their   businesses. For example, Internet reduced the dependence on ticketing agents. Most of the low-fare airlines sell tickets through their websites. Customer service is being extended by  personnel working from their homes’. All these have made it possible to reduce the costs of operations making it favorable for the low-cost airlines to operate. Also, with the Internet, customers now search and compare prices of air tickets much more easily than earlier and this accentuates the price competition.

The airline industry is susceptible to upturns and downturns with the trends in the economy. A growing economy and booming business mean greater demand for air travel, and a slow-down in the economy means reduced demand, consequent unutilized capacity and intensified competition. The availability of venture capital, and other capital sources

have an impact on the number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of operations for companies that have high levels of debt.

The airline industry is also highly susceptible to the extreme events such as the September  11, 2001 attacks on the World Trade Center. These create fears in the minds of customers toward air travel and have a severe adverse impact on the industry. It also means increased security concerns, delayed flights, reduced turnaround times, and all these have an impact on airline profitability. Also, wars with other nations and increases in fuel prices have a strong impact on profitability.

These are only some pointers, and the instructor can choose to elaborate, extend the issues or make a more detailed analysis.

In order to deal with the analysis of the competitive environment, the instructor might find it useful to use the Porter five-force framework. A brief analysis is presented below.

Threat of new entrants : The extent of threat due to new entrants is determined by how

high or low are the barriers to entry into an industry. In the airline industry, deregulation and availability of alternate sources of funding reduced the barriers to entry.

Economies of scale did not work out well for the players in the airline industry. The huband-spoke model developed by the major players, led to more of diseconomies of scale than economies. However, the large investments already made by the major airlines, and

their established networks do pose a significant threat to new entrants unless they counter it with highly efficient operations.

Product differentiation. Airlines try to create strong brand identification and customer  loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing  players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other  airlines. Some low-cost players are trying to achieve some product differentiation (e.g., JetBlue providing more legroom, directTV at each seat, etc., Southwest emphasizing commitment to customer service). However, these are not very strong barriers to entry as the other entrants are imitating them rather pretty easily.

Switching costs. There are virtually no switching costs for customers. The frequent flier   programs attempt to create switching costs. However, when the customers are presented with low-cost options, there is nothing strong enough that could prevent them from switching to other airlines.

Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment. The barriers can be heightened only when they have very closely tied and ultraefficient operating routines that competitors find it difficult to copy or imitate.

Bargaining power of suppliers is high when there are few suppliers in the industry, there

are no easy substitutes to supplier’s products, when the buyer industry is not an important customer of the supplier group, the supplier’s product is an important input to the buyer’s  business, the supplier products are differentiated or built up switching costs, the supplier  group poses a credible threat of forward integration. There are the only two major  suppliers i.e., Boeing and Airbus, to the industry and when the airline trains its pilots on either Boeing or Airbus, switching costs get built in terms of pilots’ training in the event the airline decides to change the supplier. Thus the supplier does enjoy considerable  bargaining power. However, there is no credible threat of forward integration by the suppliers such as Boeing or Airbus.

Bargaining power of buyers is low to moderate as the buyers are not concentrated. While

the buyer does not have any switching costs, and there are several choices available, they still lack concentration. Internet impacted in increasing the buyer bargaining power   because the buyers can compare the prices more easily and in view of no switching costs, they could choose whichever airline offers a low price. Thus, the buyers may be able to influence the airlines to reduce their prices over time. Another important point to note is that with the recession in the economy, business travelers were becoming more price sensitive. There is no threat of backward integration from the buyers.

Threat from substitutes is high when the distances traveled are shorter. In such cases, the

customer can choose to travel by land, by car/bus/rail as they might prove to be cheaper 

alternatives. However, for longer distances and for more hurried customers, the airlines do not face significant threat from substitute modes of travel.

The intensity of rivalry among existing competitors in the airline industry is very high.

There are numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer as each one tries to nab customers from the other in order to keep their capacity utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose off grounded planes’ as there would be few buyers. Also, due to the  bankruptcy laws, even the loss-making companies might still be around for a long time thus intensifying competition. So, it is easier to get into the industry but might be difficult to get out1.

2. Analyze the internal environment of JetBlue.

The instructor can make use of Porter’s Value Chain analysis and also introduce the students to analysis from a resource-based perspective. The limitations of SWOT analysis in directing attention to the bases of competitive advantage, and the merits of the other two approaches can be driven-home with such an analysis.

A sample analysis is presented below.

Value chain activity

How does JetBlue create value for the customer?

Primary:

1

http://www.geocities.com/lgol27/AnalyzeIndustries.htm

Inbound logistics

Web-based booking instead of booking through ticketing agents gives greater control on managing seat sales. Customers won’t get bumped.

Operations

Paperless cockpit, no meals served, no paper tickets--all reduce time and costs. Single aircraft type keeps training costs low and manpower utilization high.

Outbound logistics

New A320s are larger and more fuel-efficient. Less congested airports help quicker and on-time flight departures.

Marketing and Sales

Web-based ticketing as a distribution channel. Market segment properly identified i.e., business travelers flying pointto-point. Effective pricing.

Service

Constant communication with customer to keep them informed of changes or inconveniences. Customers are refunded sometimes when there are inconveniences. CEO travels regularly to get customer feedback first-hand. Investments in training for service orientation.

Secondary: Procurement

Well-conceived aircraft procurement plan to support growth.

Technology development.

Investments in technology from the beginning of the airline. Process initiatives such as automated baggage handling, web based ticketing, paperless cockpit etc.,

Human resource management

 Non-unionized workforce, reward systems such as stockoption plans, profit sharing, innovative recruitment policies and culture promoting camaraderie…employees called ‘crewmembers’.

General Administration

Top management with expertise in airline business, ability to coordinate and integrate activities across the value system, and highly visible to inculcate organizational culture, reputation and values.

The instructor can take the discussion further to identify and discuss the interrelationships among the various activities in the Value-chain.

A sample analysis is also presented below using the resource-based approach. There can  be great divergence in how various groups would mark these resources as valuable, rare, inimitable and non-substitutable. The instructor will probably be able to engage the students in debate and encourage discussion as to whether or not the individual value chain activities can lead to advantages that are sustainable. The instructor may also pose questions about how the interrelationships among such activities would be the source of  sustainable competitive advantage. That would help drive home the idea of ‘unique  bundles of activities/resources’ as the basis of sustainable competitive advantage much more strongly.

Resource/Activity

Is it Valuable?

Is it rare?

Yes Yes Yes No

Are there few substitutes? Yes Yes Yes No

Is it difficult to imitate? No Yes No No

Inbound logistics Operations Outbound logistics Marketing and sales Service Procurement Technology development Human resource management General adiminstration

Yes Yes Yes Yes Yes Yes Yes

No No Yes

Yes Yes Yes

No No No

Yes

No

Yes

No

Yes

No

No

No

In case of JetBlue, it is too early to say whether its resources are inimitable. This is  because there is not much of path dependency or causal ambiguity and social complexity developed at this point in time that could make the resources inimitable. As can be noticed, its efficient low-cost operations can lead to a sustainable competitive advantage in future. However, the low-cost operations themselves are interrelated to other activities such as

technology development, better human resource management etc. Therefore, JetBlue should be able to develop an interlocking system of mutually reinforcing competencies that would make it simultaneously valuable, rare, inimitable and non-substitutable, thereby  providing a competitive advantage.

The instructor may choose to complement these analyses with a detailed analysis of the financial statements of the company. To draw meaningful conclusions, the analysis can be longitudinally for JetBlue to identify the changes in the various ratios and margins or  alternatively, the student could be encouraged to collect information related to other  competing airlines and do a comparative financial statement analysis.

3. Discuss the bases of JetBlue’s competitive advantage, and the merits and demerits of   both the components. Are combination strategies better? Is JetBlue’s competitive advantage sustainable?

The two bases of JetBlue’s competitive advantage are ‘cost leadership’ and ‘differentiation’.

JetBlue achieves cost leadership by attaining efficient operations. New planes minimize maintenance and fuel costs, larger planes ensure more revenue per flight, longer hauls on an average as compared to other point-to-point services keep planes longer in air. No-meals

served helps quicker turnarounds and reduce costs. Reservation agents working from home reduce need for physical infrastructure, and thereby reduce overhead costs.

Firms pursuing low-cost strategy generally get trapped in focusing on too few of value chain activities, or lack parity on differentiation with competitors. The low-cost advantage also gets eroded when the competitive pricing information becomes available more easily. The strategy can be imitated too easily.

The other component of JetBlue’s strategy is differentiation. Differentiation is achieved through a strong brand image, the various features such as DirectTV at each seat, more legroom etc.,

The problem with differentiation strategy is that differentiating features could be easily imitated. Firms may also get entrapped in too much differentiation, which customers may not value.

Firms employing combination strategies would have a much stronger strategy to outperform rivals. They can achieve superior performance by successfully integrating lowcost operations with differentiation, thereby avoiding the pitfalls of either of the strategies.

JetBlue employed a combination of these two strategies and that gives it a distinctive competitive advantage. It combined low-cost services with a differentiated offering. The company invested in technology for efficient operations right from its inception and,

therefore, is able to provide high quality services at low-cost. Going forward, the extent to which JetBlue can maintain this integration of ‘low-cost’ and ‘differentiation’ will determine whether its competitive advantage is sustainable. The mutually reinforcing components of JetBlue’s strategy can be shown as in the figure on next page. Any change in one of the components has an impact on all interconnected activities. That is the prime reason why there are doubts being raised over JetBlue’s idea of serving mid-sized markets, and also departing from its single aircraft business model. JetBlue’s activity system 2  No meals

Pre-assigned seating, Direct TV etc.,

 No baggage transfer 

Limited but differentiated service

 No connections

with other  airlines

Limited use of  travel agents

Reliable departures

Single aircraft type A320 and  brand new aircrafts

Quick gate turnarounds

Web-based and automatic ticketing Effective reward system

Lean,  productive workforce

Short and long-haul  between large metropolitan cities from secondary airports

Very low ticket  prices

High aircraft utilization

 Non-unionized workforce

Reservation agents operate from home 2

modeled after Southwest’s activity system as in M. E. Porter. 1996. What is Strategy?  Harvard Business  Review, November-December, pp.60-79.  Also according to this article, the darker circles indicate the higher-order strategic themes. These are implemented through the clusters of tightly linked activities which are in the lighter circles.

4. How will the new Embraer Jets impact the firm’s strategy? How should they handle it? While is it not clear yet how the firm will handle the new smaller jets they offer both opportunities and possible operational problems.

The smaller Embraer jets could be used to service mid-sized cities such as Columbus and San Antonio, that can be more economically by them than the 156-seat A320. These  planes are also more cost-effective and comfortable than the smaller 50-and 70- seat jets flown by regional carriers. The company could also use them to service highly seasonal routes. During peak season, JetBlue can fly the larger A320s and during off-season, it

could switch to smaller Embraers3. Thus, addition of Embraers could give flexibility in operations.

However, the addition of Embraer jets could add to the complexity of JetBlue’s operations. One of the foundations of JetBlue’s low-cost strategy was that it had a single-model airplane fleet that helped in reducing the pilot training costs, maintenance costs and made scheduling simple. With the addition of Embraers, these could get complicated. This also has implications for labor relations because it would mean lower pay for pilots flying the smaller planes, a situation with which they may not be satisfied.

Additional question

1. What are the salient aspects of JetBlue’s culture?

JetBlue’s culture is built around the five key values of safety, caring, integrity, fun and  passion. The chief executive reinforces those values by being closely involved in the operations. He travels regularly on his flights and distributes snacks to his customers. This action sets an example to his employees on the importance of customer service. The company invests in training its employees on safety procedures. There is also an extensive orientation program in which new employees are told about the value of customer service as well as the need to be productive and committed to keep costs as low as possible. Employees are called ‘crewmembers’ and that reinforces the non-hierarchical and informal 3

E. Souder, JetBlue Plans Carribean Services Expansion. DowJones Business News. March2, 2004. http://biz.yahoo.com/djus/040302/1232000698_2.html

culture at the company. They are offered flexible work hours, and attractive compensation  plans to keep them motivated. The friendly and motivating work environment offsets some of the monetary component of pay and thus helps in reducing costs. The culture thus supports the strategy of the company.